You Never Know

The old adage that says insurance is expensive until you need it, is true. So, if you own your own aircraft or operate an aviation business with an assortment of aeroplanes on the flightline, what do you do about insurance? Indeed, what’s the first step you should take to find the right insurance policy? Derek Royal investigates.

According to Michael Dalton, Regional Manager – Aviation, Allianz Global Corporate & Specialty – Pacific, aircraft owners and operators should choose a broker carefully. “While the terms and conditions of an aviation insurance policy are not difficult for any broker to follow, the culture and the way that the General Aviation industry works are,” he says. “We generally prefer to work in conjunction with specialist aviation insurance brokers. These are organisations that deal only in aviation risk and understand the Industry as much as they do the insurance policy coverages. Many of the individuals that work at these firms are aircraft owners and pilots themselves and I think that makes them a more suitable choice as a broker. That said, policy holders need to choose an advisor that they trust and are comfortable dealing with.”

On more straightforward risks such as the private aircraft owner, some underwriters, Allianz included, will work directly with the customer without the need for a broker. Julian Fraser, National Relationship Manager – Aviation, QBE Australia, says that depending on the client’s circumstances, both options are viable. “When looking to take out insurance, one option is to engage a broker,” Fraser says. “But another option offered by some insurance companies is to deal directly with them as your insurer, meaning you will be presenting your own risk directly to an individual underwriter. When choosing an insurer, it’s a good idea to consider their values and claims approach as you will be relying on them to get you back on your feet in the event that something happens to your aircraft. This is why QBE places such an emphasis on building long-term relationships with our customers and establishing strong mutual trust so in the event of a contentious claim, our customers are best positioned for a favourable outcome.”

Insurance Cheaper than Ever

If you need insurance today, the news is good. Aviation insurance is far cheaper than it has ever been before. This is due to increased competition and also because flying is safer these days due to a variety of factors, including improvements in aircraft development and increased regulation. Also, there are a number of large global insurers writing aviation insurance in Australia and all of them are trying to increase their market share. The competition between insurers has resulted in premiums steadily decreasing over the past decade.

In addition to reducing their premiums to attract new customers, insurers are also offering wider coverage. Things that have always been excluded from aviation insurance policies are now being covered (such as “hot starts” in turbine engines), mainly because insurers are doing their best to make a point of difference. However, despite such inducements, it seems that as soon as one insurer offers a new type of coverage, the other companies follow suit. The result of this is wider coverage for aircraft owners, and broad grins on the faces of aviation consumers nationwide.

Ian Tait, MD of Aviation Insurance Australia (AIA), has been in the aviation insurance industry for more than 35 years and as a non-executive director at Cape York Helicopters, he knows a fair bit about the rotary world. “The competition is so furious at the moment that some of my clients who I’ve had for more than 15-20 years, have seen a decrease in insurance premiums every year for the past seven or eight years. Some of them are asking: ‘How much lower can this go?’ And ‘Can the insurance companies still pay the claims given the premiums that they’re quoting?’ Some people I know were four years ago paying a premium of $1.8 million and now they’re paying less than $600,000 for the same risk. The industry has virtually thrown caution to the wind, which worries me because the lower it goes, the more it has got to rebound. All I say to my clients is, “It’s a consumers market, enjoy it while it lasts.”

Katrina Parker, an aviation underwriter at Assetinsure, concurs with Tait’s parting comments and warns that “the current level of premium generated in the marketplace is unsustainable” and that aircraft owners and operators should “prepare for premiums to rise”.

Finding The Right Broker

Just as it’s important that you find the right real estate agent when you’re buying a house, it’s important to find the right insurance broker for your aviation needs. So what happens when you’ve found an agent or broker you feel you can trust?

“Whether you are a single pilot or RPT operator, be honest in your dealings with insurers,” Parker advises. “If you’ve had an incident or accident, explain the circumstances fully, take responsibility and don’t try to hide behind creative stories. Explain what post-accident actions and remedial measures have been undertaken. This provides insurers some confidence that issues are being, or have been, addressed.”

“In our experience, a reputable broker will encourage their clients to deal with an underwriter who both understands their risk and has a strong claims-handling reputation,” explains Julian Fraser, a private pilot boasting more than 500 flying hours. “As you move into the more sophisticated levels of commercial aviation or complex risks, this guidance becomes more important and the pool of brokers with the technical expertise and reputation to manage these accounts well, understandably shrinks.”

At more basic risk levels there are many brokers who manage these classes of risk well; often identified by their solid reputations and strong referral networks from their client base. In some cases flying clubs or other aircraft memberships have arrangements with individual brokers or underwriters they trust and with whom they have developed strong relationships. The essence of underwriting is understanding and rating risk. This means being able to put together terms and conditions commensurate with the risk being transferred from the insured to the insurer.

So, what factors determine the rate a client will pay for insurance?

There are several, but according to Fraser, every insurer will have a different appetite for risk that determines what they will and won’t cover. For example, aircraft such as warbirds, aerial agriculture types, rotor wing, high performance home-builds, aerobatic, floatplanes and parachuting may not appeal to all underwriters due to the inherent risk involved. Insurers will also look to pilot factors when determining insurance premiums, such as age and flying experience including experience on type/recency and ratings, as well as who trained the pilot and their accident and incident history. QBE has a philosophy of rewarding clients who demonstrate a professional commitment to operational safety, providing an advantage to lower risk clients. So the company values further education through safety courses, advanced training and recurrent training.

Dalton, who owns two classic aircraft, a Cessna 195 and 140, and boasts Australian and U.S. commercial and Airline Transport Pilot qualifications, adds: “Mostly it comes down to the type of aircraft; what it is being used for; who’s flying it and what their experience is. Some aircraft types are less desirable than others – maybe due to loss history or parts availability and naturally some pilots will not have appropriate experience to fly the aircraft they’re trying to insure.”

Pilot experience is even more of an issue these days thanks to the contentious Part 61 licensing regulations introduced by CASA last year. Part 61 enables pilots with new multi-engine endorsements to legally fly twin types they’re not actually endorsed to operate. For example, says Dalton, “a pilot that did their multi-engine training on a Piper Seminole would legally be able to fly an Aerostar, a much higher performance and less forgiving aircraft (when things go wrong). Individuals trying to buy insurance on an aircraft in which they don’t have the relevant experience, should expect some challenges or restrictions to obtain coverage.”

Dalton adds that pilots who show an insurer how they maintain currency and what check and training regime they follow will help identify them as a better risk. “Pilots who participate in safety training programs provided by the type clubs such as those available to Bonanza, Mooney and the Comanche owners or the manufacturer-endorsed training available to Cirrus owners, rate very highly with insurers,” he says. “Where that sort of training is not available then a pilot who flies regularly and is current on type will generally be an acceptable risk.”

Katrina Parker adds that Assetinsure place significant importance on the pilot’s command time; command time on the particular aircraft type to be operated and in particular, discipline and the circumstances of any incident and accident history.

“Attending type-specific and discipline-specific training courses can help control insurance costs, but this strategy is only effective if you tell your broker and the broker informs the insurer. Keep your pilot records up-to-date with your insurer – advise updated command time, command time on type and in the particular discipline at each renewal.”

But when it comes to helicopters, requirements and expectations are a little different and. according to Tait, insurers look at a number of factors when it comes to indicators of low risk for helicopters. “They look at the type of helicopter,” he says. “They then look at the value (of the helicopter). As far as an insurance company is concerned, if you’re using the helicopter for your own private pleasure, that’s the best risk of all!” It’s when the machine is used for other more “risky” missions, such as low level flying while checking fencelines or dams on the owner’s property, for example, that an insurer’s perception of risk increases.

“If you’re flying privately, in most cases the average helicopter pilot would take off, climb to about 2,000 feet, descend, land and walk away,” Tait says. “But if you’re out on your property and you’re mustering at low level, it increases the risk of what you’re doing. You might then decide that you want to teach your 16-year-old how to fly, which again expands the use of the helicopter and changes the underwriter’s perception of risk. The risk changes and so too does the premium.”

A few areas that aren’t as critical for rotary machines as they are for aeroplanes, are ratings, endorsements and courses. “Ratings and endorsements aren’t so crucial in helicopters because there are few endorsements that can be done,” Tait says. And as far as courses go, “the problem we’ve got is that the Australian market is the most competitive it has ever been and basically there is no fat in the premiums the insurance companies are charging to justify a discount or some sort of compensation for people who do safety courses. Ten years ago Australian Aviation Insurance Group (AAIG) were connected to a safety course and at that time, the whole rate of an R22 used for mustering was somewhere upwards of 16 to 17 per cent of the sum insured. But there were still accidents so AAIG sponsored this course and any pilot flying a helicopter AAIG insured had to do the course at least every two years. If a pilot didn’t do the course and crashed, they wouldn’t pay the claim. The rate was 12.5 per cent so there was an incentive for a helicopter owner to get the pilots to do the course because instead of paying say 17.5 per cent on a $200,000 machine, (which equated to around $35,000), by doing the course that rate came to around 12.5 per cent and a saving of around $10,000. So back then there was an incentive for insurers to get the pilots to do the course. The problem now is that competition has driven down the rates again where mustering rates on helicopters are between six and eight per cent. The underwriters already think it’s too cheap so they’re not going to say ‘If you go and do a course, we’ll make it even cheaper’. They just don’t have the fat, they’re not charging enough premium to give people the incentive to do courses. There’s just no money.”

Getting a Better Deal

So, despite the market being very consumer-friendly, what can be done to get a better or more comprehensive deal? According to Dalton, “the aviation policies available on the market today cover the same thing. They might vary slightly with regards to some of the trimmings around the edges but the basic coverages are largely consistent. Premium levels are at all-time lows given increased competition over recent years with some sectors paying up to a quarter of what they were 10 years ago. To get the best deal, aircraft owners should ensure they present up-to-date relevant info about their risk profile.”

Fraser agrees. “From QBE’s perspective, aircraft insurance is currently at the most competitive it has ever been. This is down to the capacity of the market generated globally, largely as a result of low (even negative) interest rates in Europe which have seen investors continue to place capital in insurance markets. Airline safety has also substantially increased around the world, causing rate reductions for the airline market and driving further capacity into General Aviation markets. Ultimately this has led to rates falling substantially in all classes of aviation insurance locally over the past five years.”

Terms of Liability

At the end of the day, when there are people involved in an air accident and there are injuries or death, the most common question is: “Who is liable? And who is going to pay?”

“I’ll be cruel here,” Tait says. “If you have a helicopter accident and your passenger is killed, that is a better outcome from a liability point of view of settlement than if the passenger is seriously injured and becomes a paraplegic. In that instance, among other things you’ve got an ongoing loss of income and the need for care, whereas if they’re deceased, there’s no care factor.

“It’s often a matter of what the pilot is doing. If he’s flying around by himself, that’s fine; but if he flies with his family and there’s an accident, then his family will sue; and it makes sense for them to do so. But if he’s regularly flying around with two mates to go heli-fishing and one of his mates is a neurosurgeon with a wife and six kids and the other’s an orthopaedic surgeon with a wife and a couple of kids, if either of them is injured or killed in an accident, you can bet your bottom dollar that their wives are going to sue the pilot for a lot more than someone else who might be a single bloke working as an apprentice at the local Ford dealership.”

While obviously shaken and in many cases, traumatised, if the pilot is not the owner of the aircraft, as long as he’s nominated on the owner’s insurance policy or he meets a warranty that declares his ability and qualifications to operate the machine in question, thanks to the common liability rules in the legal system, he’s protected.

Aviation insurance is one of the most critical facets of our industry but often the last one we think of until it’s too late. If you’re a pilot, an aircraft owner or operator, then make sure you do the right thing. And as the saying goes: “Insurance is expensive until you need it”.